Sound like a horrible error? Nope, just the IRS enforcing the law the way it’s written. Have a problem with that? Take it up with Congress. So, that’s exactly what the Coalition for Tax Fairness is doing, petitioning the government to correct badly written law that has hit some people with intolerable, inequitable tax bills.
The flawed law is the Alternative Minimum Tax and the way Incentive Stock Options (ISOs) are treated. Sounds like something that only happens to rich people? Nope. One victim was an office manager. Another was a curriculum developer with a software company.
Many of these folks were working for high tech companies in the 1990s. In lieu of cash compensation, they were given ISO’s. It’s a benefit often used by start-up companies who don’t have a lot of cash on hand, but want to give workers a reason to stick it out through the early years.
Normally, when an employee “exercises” their stock options, they don’t pay tax until they sell the stock and actually realize a gain. But, under the alternative minimum tax, the stock options become taxable the minute they are exercised – instead of when they are sold.
The problem is that in some cases, employees exercised their options only to watch the stock tank – leaving them with worthless shares. But the tax owed was based on the exercised price – not the realized gain.
The stories are heartbreaking. Facing tax bills that amounted to 400 percent of their salary, people sold their homes, liquidated college education funds and retirement plans. Facing penalties and interest on a tax she can never pay one woman related that she’ll be giving the IRS half of her salary every year – until she’s 65 years old – for a tax on income she never received. Ron Speltz, an Iowan who is in D.C. this week to tell his story to Congress, got a $252,893 tax bill for stock options worth $2,000. His tax bill was more than three times his annual salary.
Congressman Chris Van Hollen (D-MD) and Congressman Sam Johnson (R-TX) have introduced legislation, the AMT Credit Fairness and Relief Act – which will, at least, correct the law and provide relief to taxpayers who are still struggling to pay ISO-AMT liabilities. Let’s hope Congress fixes this flawed law sooner rather than later.
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